Futures Basis Trade: how the position works
Buy the asset in the cash market and sell the futures contract against it, holding both to expiry so the basis converges. The profit is fixed at the outset: it is the difference between the futures price and the spot price, less the cost of carrying the asset until delivery. Also called cash and carry, it is the trade whose existence forces futures to price near fair value in the first place.
- Market view
- Arbitrage — carry capture
- Opened for
- Margin
- Maximum profit
- The basis captured at entry, less financing, storage and insurance. Known at the outset, which is what makes it an arbitrage rather than a trade.
- Maximum loss
- Small in principle, but real in practice. It comes from financing costs rising, the position being unwound early, or a failure of the convergence assumption — not from the price of the asset.
- Breakeven
- Where the basis equals the total cost of carry.
How it is built
- Buy the underlying asset in the cash market
- Sell 1 futures contract against it
- Carry both to expiry, when the basis converges to zero by construction
All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.
Before expiry: the Greeks
Delta-neutral by construction. The exposures that remain are financing rate, storage cost and the reliability of convergence — the risks of a balance sheet rather than of a price.
When to use it
When the futures price exceeds spot by more than it costs to carry the asset, and you have the funding, the storage and the operational capacity to hold both legs to delivery. In practice that combination restricts it largely to institutions.
What goes wrong
- Funding risk. The trade is financed, and if financing costs rise after entry the locked-in margin shrinks or disappears.
- Mark-to-market on the futures leg requires variation margin daily while the cash leg produces no offsetting cash, so a rally creates a funding demand on a position that is fully hedged.
- It is heavily leveraged by construction, so a small basis move against a large position matters. This is the mechanism behind more than one well-documented dislocation in Treasury markets.
- Storage, insurance and delivery logistics are real costs and real operational risks in physical commodities.
A worked example
Gold spot at 2,650. The six-month future trades at 2,704. Financing costs 3.6% annualised.
- Basis
- $54 (2,704 − 2,650)
- Cost of carry for six months
- About $48 (2,650 × 3.6% × 0.5), before storage
- Gross arbitrage profit
- About $6 per ounce, before storage and insurance
- Risk to the price of gold
- None — the legs offset
- Real risk
- Financing rising, or variation margin on the short future
Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these. Storage and insurance for physical metal are excluded and can consume the entire $6 margin.
Common questions
Is this genuinely risk-free?
No. The price risk is hedged, but funding, margin and operational risks are not. The 2020 Treasury basis episode is the standard illustration: a hedged, leveraged position forced to unwind by margin demands rather than by any view on direction.
Related strategies
- Futures OutrightDirectional — leveraged, linear
- Futures Calendar SpreadTerm structure — non-directional
- Futures SpreadRelative value — non-directional
- Covered Futures CallNeutral to mildly bullish — income on a futures position
Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.